Shares in Vodafone Idea Ltd jumped nearly 25% on Monday after the Indian government allowed the carrier to convert $2 billion of interest on fees owed to the government into equity, which could free up some cash flow in the near term.
In 2021, India approved a rescue package for debt-constrained telecom companies that allowed them to convert interest on deferred adjusted gross revenue owed to the government into equity.
Vodafone Idea has decided to exercise the option and will issue 16.13 billion shares at 10 rupees apiece, worth 161.33 billion rupees ($1.95 billion), the mobile operator said late on Friday.
The company’s shares rose as much as 24.8% to 8.55 rupees, posting their best daily percentage gain in 16 months.
India’s Telecom Minister Ashwini Vaishnaw said in a statement on Friday that the government’s nod comes after a “firm commitment” from the Aditya Birla Group co-founder to run the company and bring in the necessary investment.
“Despite the stock dilution, we view the government debt conversion as a short-term positive for Vodafone Idea as it would free up some cash flow,” analysts at BofA Securities said in a note.
Vodafone Idea, a joint venture between Britain’s Vodafone Group and Aditya Birla Group’s Idea Cellular, was formed in 2018 to take on an intense price war unleashed by billionaire Mukesh Ambani’s wireless venture Reliance Jio.
Jio’s price competition wiped out rivals’ profits and drove the industry into losses. The government’s move will reduce only about 7% of the company’s 2.2 trillion rupees in outstanding debt from September 2022, which would not lead to any immediate free cash flow savings, Goldman Sachs analysts said in a note.
“Given its elevated debt profile, continued market share erosion and significant network gap with peers, we see a low likelihood of Vodafone Idea raising a meaningful amount of external capital,” Goldman analysts said.
